The U.S. Federal Reserve’s monetary easing cycle that began on Wednesday should weaken the U.S. dollar and thus help the euro rise, UBS strategists said in a note.
The Federal Reserve began its easing cycle by cutting interest rates by 50 basis points at its September meeting, and is expected to continue cutting rates through 2025.
Based on the Fed’s dot chart, an additional 50bp cuts are expected during the last two meetings of the year, in line with their forecast of a total of 100bp cuts for 2024. The Fed started easing monetary policy later than most other G10 central banks and from a higher interest rate level.
UBS strategists expect the Fed to cut rates “more aggressively” in the coming months and quarters than other G10 central banks, “reducing the yield advantage over the US dollar, which has been a supportive factor for the currency in recent years.”
“As a result, we expect some of the current overvaluation of the US dollar to fade over the coming months and quarters,” they added.
Meanwhile, the European Central Bank cut interest rates by 25 basis points at its September meeting, as widely expected.
There was speculation ahead of the meeting that the Fed could cut rates again in October, especially since markets have been expecting the Fed to take action at every meeting this year. However, ECB President Lagarde dismissed the speculation, leading markets to discount the odds of an October rate cut.
UBS notes that this is in line with its expectation that the ECB will adopt a gradual approach, including cutting interest rates by a quarter of a percentage point each quarter. This forecast contrasts sharply with the faster pace of easing expected from the US Federal Reserve, and confirms the bank’s forecast for a rate hike towards 1.15%.
“EUR/USD has entered the 1.10-1.15 range, as we expected. We expect the pair to rise above 1.15 in 2025,” the note read.
UBS confirms that after breaking the 1.10 resistance level in August, this level has now become a new support level in September. On the positive side, the bank identifies the 1.13 and 1.15 levels as key resistance levels to watch going forward.